The Big Mac Index

The Big Mac index is published by the Economist, It is purely based on the theory of purchasing power parity (PPP) the notion that in the long run exchange rates should move towards the rate that would equalise the prices of a basket of goods and services around the whole world. In simple words we take a ‘MacDonalds Big Mac’ as the benchmark and compare its price in the 120 countries in the world where it is sold and produced. Let us take an example, suppose the price of a Big Mac in the U.S is $3 and for the same burger in the UK it is £2. Looking at this the exchange rate would be 3 divided by 2 which would give us 1.5. Now if the exchange rate of dollars to pounds was greater than 1.5 it would mean the pound was overvalued and less than 1.5 it would be undervalued.

According to the index above average price of a Big Mac in the US is $4.07, In Malaysia it is $2.42 at the market exchange rates which means it is 40% cheaper. To make both the prices equal it would require an exchange rate of 1.77 to the dollar (Ringgit 7.20 divided by 1.77). This also suggests that the Malaysia Ringgit is undervalued by 40% against the dollar. Since the index is based on PPP we now look at what it means and the two types of conditions that go with it. STUDENT NUMBER: 092008164 Purchasing Power Parity is a condition between countries where an amount of money has the same purchasing power in different countries. The prices of goods between countries would only reflect the exchange rates. Identical products sold in different markets will sell at the same price when expressed in terms of a common currency in the presence of a competitive market structure and absence of transport costs and other barriers to trade. PPP is based on the ‘Law of one price’ which is based on the idea of perfect good arbitrage. Absolute Purchasing Power...

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...BIGMACINDEX
WHAT IS A BIGMACINDEX?
The bigMacindex is a theory dealing with PPP purchase power parity. The bigMacindex was created by the Economist based on the Purchase Power theory, the first step understands what the Purchase power theory is.
Here is a brief example to better understand the purchase power theory; suppose that one US dollar is currently in the market for ten Argentinean pesos. In the United States a soccer ball costs $40 while in Argentina they sell the same soccer ball at 150 pesos. Since 1 US dollar is the same to 10 pesos, the soccer ball that in United States you could buy for $40 bucks and 15 pesos if we buy it in Argentina. There’s an advantage of buying the soccer ball in Argentina this will bring some upsets to the soccer ball market in the US.
Getting back to the bigMacindex it is easier to understand now. The theory points that the exchange rate between one currency to another will balance when they purchase power parity are equivalent. In other words goods in United States and in Panama should cost the same taking in consideration the exchange rate.
WHAT IS THE UNDERLYING THEORETICAL CONCEPT?
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...(PPP) of currencies using the BigMacIndex™
Table of Contents
1. Introduction
2. Purchasing Power Parity and Theory of one Price
3. Over/Under Valuation of currencies against the Dollar
5. Comparative analysis of the most overvalued to the most undervalued
6. Observation and Alternative indexes
7. Limitations
8. Appendix
INTRODUCTION
Purchasing power parity (PPP) is an important and critical topic in international economics. It arises when the purchasing power of an amount of money is the same in different countries. This is when prices of two different countries are converted to a common currency. The idea is based on the law of one price, where in the absence of official trade restrictions, similar goods will have the same price in different markets, with the prices being expressed in the same (common) currency.
Deviations from parity infer differences in purchasing power of goods across countries, which means that for the purposes of many international comparisons, countries' GDPs or other national income statistics need to be "PPP adjusted" and converted into common units. There can be a huge difference when adjusted by purchasing power and when converted via market exchange rates. For ex:- If calculated at nominal exchange rates, India has the tenth largest economy while adjusting by PPP, India has the fourth largest economy. Thus, to remove this discrepancy, a common currency of measurement is highly...

...This paper will introduce the concept of Purchasing power parity, and specifically how the BigMac has been used to apply this concept. It will critically assess whether the BigMac is a worthy instrument for measuring PPP, the critical issues when measuring PPP, and a possible alternative that might provide a suitable substitute, should the Economist decide to use other products to replace their “BigMacIndex”.
Purchasing Power Parity
Purchasing Power Parity (PPP) is a theory, which states that exchange rates between currencies are in equilibrium when their purchasing power is the same in each of the two countries. This means that the exchange rate between two countries should equal the ratio of the two countries' price level of a fixed basket of goods and services. Therefore when a country's domestic price level is increasing, that is a country experiences inflation, if PPP holds then it follows that country's exchange rate must depreciate in order to return to equilibrium.
The basis for PPP is the "law of one price". In the absence of transportation and other transaction costs, competitive markets will equalise the price of an identical good in two countries when the prices are expressed in the same currency. Otherwise there is an arbitrage opportunity (arbitrage being defined as “the simultaneous purchase and sale of substantially identical assets in order to...

...competitor selling similar products at a cost lower than your own manufacturing cost due to advantages of outsourced or cheaper means of production. Anti-dumping laws are set by the government to prevent selling by these companies and give domestic companies a fair chance to compete. This is done by introducing trade barriers.
Trade Barriers: Various forms of duties, taxes levied by the local government to protect domestic industries from falling prey to international competiton who take advantage of low production costs.
BigMacIndex: The BIGMACindex is based on the theory of Purchasing Power Parity of a given currency. In other words, it is the value that a currency possess to purchase the same product but in different economies. In the BMI, the BigMac burger of McDonalds has been taken as a common product and the average price of the burger is compared across various economies in terms of its value in USD.
Wikipedia Defination : The BigMacIndex is published by The Economist as an informal way of measuring the purchasing power parity (PPP) between two currencies and provides a test of the extent to which market exchange rates result in goods costing the same in different countries. It "seeks to make exchange-rate theory a bit more digestible
What determines FOREX rate?
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The McDonald’s corporation – “McDonald's is the leading global food-service retailer with more than 34,000 local restaurants serving nearly 69 million people in 118 countries each day” (McDonalds Corporation, 2014). The statistics alone are impressive for a company that started as a single restaurant in Des Plaines, IA in April, 1955 (McDonalds Corporation, 2014). Even more impressive is the influence McDonald’s has on global economic forecasting by virtue of its signature sandwich – the BigMac.
The BigMac is synonymous American culture and in “1986 the British periodical The Economist has used the price of the BigMac to estimate the exchange rate between the dollar and other currency” (Daniels et al., 2011, p. 373). The basic premise behind the BigMacindex is to “measure purchasing power parity” (The Economist, 2014). The index hypothesizes a set value for a basket of items and compares the cost for the basket against different currencies. The BigMacindex uses the McDonalds BigMac as the basket item and the dollar as the stable currency. By comparing the cost of a BigMac in the United States to the cost of a BigMac in other counties,...

...Daily chart: The BigMacindex | The Economist
http://www.economist.com/blogs/graphicdetail/2012/01/daily-chart-3/print
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Daily chart
Jan 12th 2012, 16:53 by The Economist online
Burgernomics shows Switzerland has the most overvalued currency THE ECONOMIST's BigMacindex is based on the theory of purchasing-power parity: in the long run, exchange rates should adjust to equal the price of a basket of goods and services in different countries. This particular basket holds a McDonald's BigMac, whose price around the world we compared with its American average of $4.20. According to burgernomics the Swiss franc is a meaty 62% overvalued. The exchange rate that would equalise the price of a Swiss BigMac with an American one is SFr1.55 to the dollar; the actual exchange rate is only 0.96. The cheapest burger is found in India, costing just $1.62. Though because BigMacs are not sold in India, we take the price of a Maharaja Mac, which is made with chicken instead of beef. Nonetheless, our index suggests the rupee is 60% undercooked. The euro, which recently fell to a 16-month low against the dollar, is now trading at less than €1.30 to the greenback. The last time we served up our...

...My product is the BigMac. For my customer segment I have chosen to combine teens and young adults. The new group will be called all adults fifteen and over. Also I am renaming the elderly with elder adults. The younger adults have a wider taste pallet. They are more likely to try new things. Also if the people they know are trying and likening the product, they will be more likely to try it.
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The primary group in my splicing of groups is the teens. “Brand marketers that target teens have so many variables to consider, including their interests, brand loyalties, shopping behaviors and Internet usage,” said Don Dam ore, CEO of ASL, in a statement. “This segmentation breaks down not only what teens are interested in, but where and how they shop, and how they respond to direct mail, digital advertising and in-store marketing. It also shows how teens use different forms of traditional and new media.” Now as a teen we could just about eat anything we wanted and not have to worry about the cost. This is the main consumer of...

...McDonald’s Corporation.
1.0 Introduction
McDonalds Corp., headquartered in Oak Brook Illinois, is the world’s number one fast food chain, serving about 49 million customers daily. The company operates and licenses more than 31,000 restaurants 30,000 McDonald’s in about 120 countries which generated a total $19.06 million in revenues for the fiscal year of 2012. McDonald’s brand is one of the ten most popular brands worldwide. Continuous marketing, promotional and public relations activities promote McDonald’s brand image in order to differentiate the Company from its many competitors. McDonald’s restaurant offer a menu that is uniform to all locations and emphasizes low value prices which includes its famous burgers, cheeseburgers like the BigMac, Quarter Pounder with Cheese, several chicken sandwiches, Chicken McNuggets, french fries, salads, desserts, sundaes, soft drinks and other beverages. Its restaurants also provide breakfast menu that would include Egg McMuffin, bagel sandwiches, hotcakes, and muffins. Many new products were introduced in the last two years in accordance to the management’s decision to establish a new menu with more choices that is expected to bring a significant growth in sales as it was already shown by the financial results of 2012 which the highest increase in US comparable sales for the last 30 years.
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